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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
(AMENDMENT NO. 2)
SOLICITATION/RECOMMENDATION STATEMENT
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
ITT CORPORATION
(Name of Subject Company)
ITT CORPORATION
(Name of Person(s) Filing Statement)
COMMON STOCK, NO PAR VALUE
(INCLUDING THE ASSOCIATED SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK
PURCHASE RIGHTS)
(Title of Class of Securities)
450912 10 0
(CUSIP Number of Class of Securities)
RICHARD S. WARD, ESQ.
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND CORPORATE SECRETARY
ITT CORPORATION
1330 AVENUE OF THE AMERICAS
NEW YORK, NY 10019-5490
(212) 258-1000
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person(s) Filing Statement)
WITH A COPY TO:
PHILIP A. GELSTON, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
(212) 474-1000
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INTRODUCTION
The Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") originally filed on February 12, 1997, by ITT Corporation, a
Nevada corporation (the "Company"), relates to an offer by HLT Corporation, a
Delaware corporation ("HLT") and a wholly owned subsidiary of Hilton Hotels
Corporation, a Delaware corporation ("Hilton"), to purchase 61,145,475 shares of
the common stock, no par value (including the associated Series A Participating
Cumulative Preferred Stock Purchase Rights), of the Company. All capitalized
terms used herein without definition have the respective meanings set forth in
the Schedule 14D-9.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
The response to Item 8 is hereby amended by the addition of the
following after the paragraph describing the Answer and Counterclaim filed by
the Company:
On February 13, 1997, the Company filed a motion for an injunction
(the "Counsel Motion") requiring Hilton to discharge Latham & Watkins as its
counsel. The Counsel Motion seeks (i) an order requiring Hilton to dismiss
Latham & Watkins as its counsel in connection with the Hilton Tender Offer or,
in the alternative, (ii) a preliminary injunction enjoining Hilton from seeking
Latham & Watkins' counsel until the court can review the merits of the Counsel
Motion. A copy of the Counsel Motion is filed as Exhibit 26 hereto and is
incorporated herein by reference.
On February 14, 1997, the Company filed a memorandum in opposition
(the "ITT Memorandum in Opposition") to the Hilton Preliminary Injunction
Motion. A copy of the ITT Memorandum in Opposition is filed as Exhibit 27
hereto and is incorporated herein by reference.
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ITEM 9. EXHIBITS.
The response to Item 9 is hereby amended by the addition of the
following new exhibits:
26. ITT Motion for an Injunction Requiring Hilton to Discharge Latham &
Watkins as Counsel dated February 13, 1997.
27. ITT Memorandum in Opposition to Hilton's Motion for a Preliminary
Injunction dated February 14, 1997.
2
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this Statement is true, complete and correct.
ITT CORPORATION
By /s/ RICHARD S. WARD
-----------------------------------
Name: Richard S. Ward
Title: Executive Vice President,
General Counsel and
Corporate Secretary
Dated as of February 19, 1997
3
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EXHIBIT INDEX
Exhibit Description Page No.
(26) ITT Motion for an Injunction Requiring Hilton
to Discharge Latham & Watkins as Counsel
dated February 13, 1997 . . . . . . . . . . . . . . . .
(27) ITT Memorandum in Opposition to Hilton's Motion
for a Preliminary Injunction dated February 14, 1997 . .
4
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THOMAS F. KUMMER
VON S. HEINZ
KUMMER KAEMPFER BONNER & RENSHAW
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
(702) 792-7000
Attorneys for Defendant/Counterclaimant
ITT CORPORATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
HILTON HOTELS CORPORATION and )
HLT CORPORATION, ) Case No. CV-S-97-95-PMP(RLH)
)
Plaintiffs, )
)
vs. )
)
ITT CORPORATION, )
)
Defendant. )
_______________________________________)
)
ITT CORPORATION, ) DEFENDANT/COUNTERCLAIMANT
) ITT'S MOTION FOR A PERMANENT
Defendant and ) (OR A PRELIMINARY)INJUNCTION
Counterclaimant, ) REQUIRING HILTON TO
) DISCHARGE LATHAM & WATKINS
vs. ) AS COUNSEL
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Plaintiffs and )
Counterdefendants. )
_______________________________________)
Defendant/counterclaimant ITT Corporation ("ITT") moves pursuant to
Fed. R. Civ. P. 56 for summary judgment on Count One of its Counterclaims, which
seeks an order requiring plaintiff/counterdefendants Hilton Hotels Corporation
and HLT Corporation (collectively, "Hilton") to dismiss Latham & Watkins
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2
("Latham"), based on Latham's concurrent representation of ITT, as Hilton's
legal advisers in connection with Hilton's attempted hostile takeover of ITT.
In the alternative, ITT, in order to avoid irreparable injury to itself and the
public, moves pursuant to Fed. R. Civ. P. 65 for a preliminary injunction
enjoining Hilton from seeking Latham's counsel on the hostile takeover of ITT
until this Court can review the merits of ITT's motion. ITT's motion is based
upon the following memorandum of points and authorities in support of its
motion, the affidavit of Theodore J. Fischkin and the exhibits attached thereto
(attached hereto as Exhibit A), the declaration of Charles W. Wolfram and the
exhibit thereto (attached hereto as Exhibit B), and the oral argument of counsel
as may be presented at a hearing on this motion to the extent that this Court in
its discretion decides a hearing is necessary, pursuant to LR-78.2.
Dated this 12th day of February, 1997.
KUMMER KAEMPFER BONNER & RENSHAW
BY: /s/ Von S. Heinz
----------------
THOMAS F. KUMMER
VON S. HEINZ
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
Attorneys for Defendant/
Counterclaimant
ITT CORPORATION
ITT'S MEMORANDUM OF POINTS AND AUTHORITIES
Preliminary Statement
Hilton has retained the services of Latham in Hilton's hostile attempt to
acquire control of ITT. The interests of
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3
Hilton, as a hostile bidder, and ITT, as the target, are plainly adverse.
Latham also represents ITT. Latham's representation of Hilton in these
circumstances constitutes a breach of ethical duties owed to ITT. In addition,
Latham is privy to confidential information regarding ITT that would be
extremely helpful to Hilton in its hostile takeover attempt.
Had Hilton chosen to utilize Latham as counsel of record in this
litigation, it is clear that the ethical rules would require that Latham be
disqualified. Hilton has not done so, however -- choosing instead to utilize
Latham "behind the scenes" as it were. Nonetheless, Latham's adverse
representation is still plainly improper and Hilton should not be allowed to
benefit (at ITT's expense) from Latham's continuing breach of its duties to ITT.
Because the facts are clear and indisputable, ITT brings this motion for
summary judgment on Count One of its Counterclaim that Hilton should be ordered
to dismiss Latham as counsel in connection with Hilton's hostile takeover
attempt of ITT.
Statement of Facts
On January 27, 1997, Hilton announced its intention to launch a hostile bid
to acquire control of ITT and filed suit against ITT in this Court seeking
injunctive and declaratory relief to aid its efforts. See Affidavit of
Theodore J. Fischkin dated February 13, 1997 ("Fischkin Aff.") PARA 2; see also
Hilton's Complaint. The next day, Hilton publicly admitted that Hilton was
being represented by Latham and Wachtell, Lipton, Rosen &
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4
Katz ("Wachtell") in connection with Hilton's hostile takeover attempt.
Fischkin Aff. PARA 3.
Latham is serving and has long served as counsel to ITT and its
subsidiaries. Fischkin Aff. PARA PARA 4-5. For example, Latham currently
represents ITT and its subsidiary, ITT Education Services, Inc. ("ITT-ESI") in
major litigation in California state court (Fischkin Aff. PARA 6) and has been
responsible for coordinating ITT'S overall strategy with respect to the
statutory issues involved in that case, including seeking a legislative solution
and filing suit against a state agency and its officials (Fischkin
Aff. PARA 11).1 Further, Latham is currently under retention as an antitrust
advisor to ITT and has recently been involved in providing advice to ITT on very
significant antitrust matters. Fischkin Aff. PARA 15. Latham is regulatory
counsel to an ITT subsidiary, has advised ITT on regulatory matters prior to
ITT's recent acquisition of this subsidiary in partnership with Dow Jones & Co.
and, in the last several months, has been consulted with respect to very
significant future business plans of that subsidiary. Fischkin Aff. PARA 14.
_____________
1In that case, Eldredge, et al. v. ITT Educational Services, Inc., ITT
Technical Institute, ITT Corporation, et al., which involves allegations of
fraud and conspiracy in the recruitment of students, a jury returned a
verdict in October 1996 against ITT for $4 million in punitive damages. The
trial court granted ITT judgment notwithstanding the verdict. Fischkin Aff.
PARA 7. Latham has been advising ITT-ESI in litigation in Texas and has
previously represented ITT-ESI in other California litigation. Fischkin Aff.
PARA 12.
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5
Latham itself made no disclosure to ITT prior to undertaking its
representation of Hilton in its hostile takeover attempt of ITT. Fischkin
Aff. PARA 16. Upon learning that Hilton was represented by Latham in this
connection, ITT began to attempt to discuss the situation with Latham. Fischkin
Aff. PARA 16. Latham steadfastly refused to discuss the situation in any
meaningful way and, on January 31, 1997--after ITT had advised Latham of its
concerns--Latham purported to withdraw as counsel to ITT in the Eldredge matter.
Fischkin Aff. PARA PARA 16-17. Latham went so far as to state that Latham was
"unable" to represent ITT on the Eldredge appeal, even though Latham was ITT's
counsel of choice for this important appellate work, and had actually begun the
appellate work months ago. Fischkin Aff. PARA PARA 8, 9, 10, 17. ITT has not
consented to Latham's purported withdrawal. Fischkin Aff. PARA 18.
Prior to seeking judicial intervention, ITT repeatedly attempted to obtain
assurances that Latham had not, despite Hilton's public statement, undertaken to
represent Hilton in its hostile takeover attempt. Fischkin Aff. PARA PARA 16,
18, 19, 21.2 Latham, however, has refused to confirm or deny Hilton's public
statements and has instead informed ITT only that Latham would not itself
"implement" actions hostile to ITT and that "it would
_____________________
2ITT has also made requests of Wachtell for an explanation of these ethical
problems. Fischkin Aff. PARA 19. Wachtell has not responded. Id. PARA 22.
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6
not be appropriate to discuss [Latham's] representation of others." Fischkin
Aff. PARA PARA 16, 21.
During the course of Latham's extensive representation of ITT and its
subsidiaries, it has been afforded access to, and is in possession of,
privileged communications, client confidences, confidential business plans, and
other competitively sensitive and strategic information about ITT and its
subsidiaries that would be useful to a potential acquiror such as Hilton in
evaluating ITT as a target. Fischkin Aff. PARA PARA 5, 13, 14, 15.
Argument
I LATHAM'S REPRESENTATION OF HILTON VIOLATES ITS ETHICAL DUTIES TO ITT.3
As Professor Wolfram, the Chief Reporter since 1986 for the American Law
Institute's Restatement of the Law Governing Lawyers, opines in his Declaration:
"Latham & Watkins' representation of Hilton in its attempted hostile
takeover of ITT while the Eldredge litigation and other ongoing
representations continue violates the conflict of interest rules to which
Latham & Watkins is subject, requiring that it cease representing Hilton;"
and
"[I]n representations of ITT and its subsidiaries in recent years, Latham &
Watkins has gained operating, marketing, planning, and other strategic
business information about its
_______________
3The only lawyer Latham has identified so far as representing Hilton is a
member of the District of Columbia ("D.C.") and New York bars with his resident
office in D.C. The Latham lawyers representing ITT on antitrust matters and the
pending Eldredge matter are members of the California bar with resident offices
in San Francisco and San Diego, respectively. At the very least, therefore,
Latham must meet the ethical standards of D.C. and California. As demonstrated
herein and in the Wolfram Declaration (PARA 15 & n.4), the governing ethical
principles of either jurisdiction, as well as the Model Rules, require Latham's
disqualification.
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7
client ITT that Latham & Watkins was obliged to hold confidential and that
would be of great value to Hilton in furthering its attempted hostile
takeover of ITT. In my professional opinion, those prior
representations--even if considered as completed, and not concurrent,
representations--are substantially related to Latham & Watkins' current
representation of Hilton, which independently requires that the latter
representation cease." Declaration of Charles W. Wolfram dated
February 13, 1997, ("Wolfram Decl.") PARA 1.
We demonstrate below that both the undisputed facts and the applicable ethical
rules and legal principles4 make plain that Professor Wolfram is surely correct
that Latham has breached its ethical obligations.
A. Latham's Representation of Hilton in Its Hostile Bid for ITT Is a Per
Se Breach of Ethics
When lawyers simultaneously represent two clients with adverse interests,
they breach the indivisible duty of loyalty they owe to their clients. See
Flatt v. Superior Court, 885 P.2d 950, 953 (Cal. 1994); see also
Manoir-Electroalloys Corp. v. Amalloy Corp., 711 F. Supp. 188, 196 (D.N.J.
1989); Model Rule 1.7 cmt.; D. C. Rule 1.7 cmt.; Cal. State Bar Rule 3-310
(1996).5 Because the duty violated by dual representation is
___________
4The rules of professional conduct set a minimum standard of ethics. See,
e.g., Griva v. Davison, 637 A.2d 830, 841-44 (D.C. 1994). Common law standards,
established by case authority, however, often impose binding higher standards on
attorneys' conduct. See, e.g., Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp.,
43 Cal. Rptr. 2d 327, 331-332 (Cal. Ct. App. 1995).
5Even where the two representations have nothing in common, the offending
attorneys will be subject to the "perse or 'auto-matic'" rule of
disqualification. Flatt, 885 F.2d at 955; Griva, 637 A.2d at 843 (absolute
prohibition absent disclosure and consent).
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8
client loyalty, no showing is required that confidences have been obtained by
counsel.6 As long as the interests of the two clients are adverse, the
"mandatory rule of disqualification" applies. Flatt, 885 F.2d at 956; Wolfram
Decl. PARA 15 (and authorities cited therein).7
Here, Hilton's interests are unquestionably adverse to ITT's. The
interests of a hostile tender offeror as to price, control and other issues are
adverse to those of the target. See Wolfram Decl. PARA 16. If there were any
doubt that Hilton's and ITT's interests are adverse, the filing of this suit has
laid it to rest. That Hilton does not name Latham as counsel of record
_______________
6See Truck Ins. Exch. v. Fireman's Fund Ins. Co., 8 Cal. Rptr. 2d 228, 231
(Cal. Ct. App. 1992). See also United States v. Davis, 780 F. Supp. 21, 23
(D.D.C. 1991) (citing D.C. Rule 1-7 as a prophylactic measure "guarding against
the appearance of a conflict.")
7The "per se" rule is widely followed. See, e.g., Davis, 780 F. Supp. at
23 (applying D.C. Rule 1.7 to hold that "the appearance of a conflict" required
disqualification); British Airways, PLC v. Port Authority, 862 F. Supp. 889, 893
(E.D.N.Y. 1994); Lemelson v. Apple Computer, Inc., 1993 U.S. Dist. LEXIS 20132 @
* 20 (D. Nev. Jun. 3, 1993), Mag. Judge's Order Adopted, 1993 U.S. Dist. LEXIS
20131 (D. Nev. July 19, 1993); Teradyne v. Hewlett-Packard Co., 1991 WL 239940,
at * 2 (N.D. Cal. Jun. 6, 1991)(the Ninth Circuit "has held that
disqualification . . . requires no showing of specific 'adverse effect'");
Manoir-Electroalloys Corp., 711 F. Supp. at 195-9 (Model Rule 1.7 requires, "a
per se rule of disqualification"); Unified Sewerage Agency v. Jelco, Inc., 646
F.2d 1339, 1345 (9th Cir. 1981); International Business Machines Corp. v. Levin,
579 F.2d 271, 283 (3d Cir. 1978). See generally, In re Dresser Indus., Inc.,
972 F.2d 540, at 544 and n.9 (5th Cir. 1992)(holding that under "current
national standards of legal ethics", "a specific adverse effect probably will
not have to be shown. All that need be present is that one lawyer is or firm is
representing two clients, even in unrelated matters, with potentially
conflicting interests.")
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9
in this lawsuit (or in its S.E.C. filings) is immaterial for conflict of
interest purposes -- Latham cannot evade its ethical obligations to ITT by
providing advice and other services to Hilton while having another firm sue ITT.
Wolfram Decl. PARA 16.
Furthermore, even if Hilton is being advised in its takeover bid for ITT by
Latham lawyers different from those representing ITT, dismissal is mandatory.
As noted by Professor Wolfram, conflicts of interest that burden an individual
lawyer burden every other lawyer in the firm. Wolfram Decl. PARA 17.8
Nor is it a defense that Latham is a national law firm and that different
offices are, in part, involved. As one court, construing California law,
recently concluded:
"Bryan Cave has approximately 400 attorneys practicing in sixteen offices
. . . [I]t is of no consequence that Bucher practices with the Washington
office, and the litigation relating to this case is being handled by the
St. Louis office. Like an infectious disease, the disqualification affects
every lawyer in the law firm, wherever located". In re Mortgage & Realty
Trust, 195 B.R. 740, 755 (Bankr. C.D. Cal. 1996).
Accord, Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1321 (7th
Cir. 1978) ("[T]here is no basis for creating separate disqualification rules
for large firms even though the burden of complying with ethical considerations
will naturally fall more heavily upon their shoulders").
_____________
8See Henriksen v. Great Am. Sav. and Loan, 14 Cal. Rptr. 2d 184, 187 (Cal.
Ct. App. 1992); Model Rule 1.10(a); D. C. Rule of Professional Responsibility
1.10; Flatt, 885 P.2d at 955-57; Cinema 5 Ltd. v. Cinerama, Inc., 528 F.2d 1384,
1387 (2d Cir. 1976) (cited approvingly in Flatt); Rosenfeld Constr. Co. v.
Superior Court, 286 Cal. Rptr. 609, 612 (Cal. Ct. App. 1991).
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10
B. Latham's Purported Withdrawal From Eldredge Does Not Permit It to
Represent Hilton.
After undertaking its adverse representation of Hilton in Hilton's hostile
bid for ITT, Latham attempted to withdraw unilaterally from its representation
of ITT in Eldredge. Latham, however, may not cure its conflict and consequent
breach of the duty of loyalty owed to ITT by dropping representation of ITT in
favor of Hilton. See Wolfram Decl. PARA PARA 18-19 (and authorities cited
therein); see also Lemelson v. Apple Computer, Inc., 1993 U.S. Dist. LEXIS 20132
@ * 19 (D. Nev. Jun. 3, 1993), Mag. Judge's Order Adopted, 1993 U.S. Dist. LEXIS
20131 (D. Nev. July 19, 1993).
Latham's behavior cannot -- and must not -- be countenanced. As the
California Supreme Court has made clear, "the expedient of severing the
relationship with the pre-existing client" will not remedy a "dual
representation conflict[]". Flatt, 885 P.2d at 957-58; see Stratagem Dev.
Corp. v. Heron Int'l N.V., 756 F. Supp. 789, 794 (S.D.N.Y. 1991); Picker Int'l
Inc. v. Varian Assocs. Inc., 869 F.2d 578, 583 (Fed. Cir. 1989).
C. Even if ITT Were Not a Current Client, Latham May Not Represent Hilton
in Its Hostile Tender Offer for ITT.
Even assuming that Latham's attempted withdrawal was effective -- which it
was not -- and that Latham had no other current representation of ITT, which it
does,9 Hilton must still
______________
9In addition to Eldredge, antitrust work by Latham for ITT has continued in
1997; Latham has not attempted to terminate that representation and could not do
so without ITT's consent. See Fischkin Aff. PARA PARA 5, 15.
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11
dismiss Latham because of Latham's access to confidential information highly
relevant to ITT's takeover bid. See Wolfram Decl. PARA PARA 21-22 (and the
authorities cited therein).
Law firms owe a duty of confidentiality to past (and present) clients.10
This duty of confidentiality is so important that whenever a "'substantial
relationship can be shown between the subject matter of a former representation
and that of a subsequent adverse representation, the latter will be
prohibited.'" Rosenfeld Construction, 286 Cal. Rptr. at 613 (quoting T.C.
Theatre Corp. v. Warner Bros. Pictures, 113 F. Supp. 265, 268 (S.D.N.Y. 1953)).
Such a substantial relationship is presumed to exist "[i]f there is a reasonable
probability that confidences were disclosed which could be used against the
client in later, adverse representation." Trone v. Smith, 621 F.2d 994, 998
(9th Cir. 1980).11 Whether such potentially useful and confidential
information actually has been
___________
10An attorney's duty to keep client confidences continues even after the
representation ends. "'[The lawyer] is enjoined for all time, except as he may
be released by law, from disclosing matters revealed [ ] by reason of the
confidential relationship'". Rosenfeld Construction, 286 Cal. Rptr. at 613
(quoting T.C. Theatre Corp. v. Warner Bros. Pictures, 113 F. Supp. 265, 268
(S.D.N.Y. 1953)).
11See also Restatement (Third) of the Law Governing Lawyers Section 213(2)
(Proposed Final Draft No. 1, March 29, 1996); Western Continental Operating Co.
v. Natural Gas Corp., 261 Cal. Rptr. 100, 104 (Cal. Ct. App. 1989)
("Disqualification of an attorney from representing a former client does not
require proof of actual possession of confidential information").
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11
passed to the current client is irrelevant. See Rosenfeld Construction, 286 Cal.
Rptr. at 613.
Neither Hilton nor Latham can, in good faith, contend that ITT confidences
disclosed to Latham are not material to Hilton's bid. For example, as Professor
Wolfram states:
"[T]he information about ESI is material to Hilton's current financial
plans and strategies and would be very beneficial to Hilton in setting a
value on ITT. It would also be detrimental to ITT and its subsidiaries. A
prospective acquirer will often obtain valuation of what are non-core
businesses for the acquirer by pre-acquisition shopping of the businesses
to prospective purchasers. Those are often present competitors of the
target company. In that way, competitively sensitive information of ITT
and its subsidiaries could be learned by competitors and employed against
ITT and its subsidiaries both pre-acquisition and after an unsuccessful
acquisition attempt is rejected." Wolfram Decl. PARA 5.
Because such information, which includes highly confidential business plans,
pricing and competitive strategies, market studies, joint programming
proposals, confidential government submissions, privileged communications, anti
trust analyses and other competitively sensitive information (see Fischkin Aff.
PARA PARA 5, 13, 14, 15), could be used against ITT in Latham's adverse
representation of Hilton, a substantial relationship is presumed to exist
between Latham's previous representation of ITT and its current representation
of Hilton. See Trone, 621 F.2d at 998. Thus, even if ITT were no longer a
current client of Latham's -- which it still is -- Latham's representation of
Hilton would still violate duties owed to ITT.
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12
II. HILTON SHOULD BE ORDERED TO DISMISS LATHAM AS ITS COUNSEL IN ITS HOSTILE
TENDER OFFER FOR ITT.
As demonstrated above there is no genuine issue of material fact or law.
Latham has clearly breached its duties to ITT. To protect ITT's rights and to
preserve the integrity of the legal system, this Court should require Hilton to
dismiss Latham as a takeover advisor.
Hilton should not be allowed to benefit from Latham's continuing breach of
its duties to ITT. An order requiring Hilton to dismiss Latham "is exactly the
sanction which should be imposed". Lemelson v. Apple Computer, Inc., 1993 U.S.
Dist. LEXIS 20132 @ * 20 (D. Nev. June 3, 1993), Mag. Judge's Order Adopted,
1993 U.S. Dist. LEXIS 20131 (D. Nev. July 19, 1993), Allman v. Sears, Roebuck &
Co., 1988 WL 109109, at *4 (E.D. Pa. Oct. 18, 1988). Indeed, where a breach of
loyalty exists "it would ordinarily be error for the court to fail to declare
the disqualification." International Bus. Machs. Corp. v. Levin, 579 F.2d 271,
279 (3d Cir. 1978).
Moreover, the public interest served by the ethical rules mandates an order
requiring Hilton to dismiss Latham. See Image Technical Servs., Inc. v. Eastman
Kodak Co., 820 F. Supp. 1212, 1218 (N.D. Cal. 1993).12 Conduct such as Latham's
continued
________________
12"The maintenance of the integrity of the legal profession and its high
standing in the community are important additional factors to be considered in
determining the appropriate sanction for a Code violation." Lemelson,
1993 LEXIS 20132, @ * 21-22 (quoting International Bus. Machs. Corp. v. Levin,
579 F.2d at 283).
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14
representation of Hilton erodes the public's confidence in the legal
profession.13 Indeed, concern for the public's perception is so strong that an
order requiring Hilton to dismiss Latham would be mandated even if Latham's
continued representation of Hilton merely presented the appearance of such
forbidden representation. See Cinema 5 Ltd. v. Cinerama, Inc., 528 F.2d 1384,
1387 & n.1 (2d Cir. 1976); Erickson v. Newmar Corp., 87 F.3d 298, 303 (9th Cir.
1996) ("a court may disqualify an attorney for not only acting improperly but
also for failing to avoid the appearance of impropriety") (quoting Gas-A-Tron of
Ariz. v. Union Oil Co., 534 F.2d 1322 (9th Cir. 1976)).
In the present circumstances, an order requiring Hilton to dismiss Latham
is thus the only appropriate remedy.14
____________________
13There is a "long standing rule in both California and Ninth Circuit cases
prohibiting attorneys from accepting employment adverse to a current client
without the client's informed consent". Image Technical Services, 820 F. Supp.
at 1218. "The court and the legal profession have a strong interest in insuring
that counsel fulfill the highest duty of loyalty to client. . . .Law is a
profession of service premised upon representation of the client with the
highest duty of loyalty and the deepest regard for the trust of the client".
Id. Latham has grossly failed to satisfy this duty.
14Clearly a permanent injunction is proper here. Given that there exists
no genuine issue of material fact as to the impropriety of Latham's
representation of Hilton against ITT, ITT need only show the lack of an adequate
remedy at law, and perhaps a balance of hardships in its favor, in order to
secure permanent injunctive relief. See, e.g., Continental Airlines, Inc. v.
Intra Brokers, Inc., 24 F.3d 1099, 1104-05 (9th Cir. 1994). Moreover, as
discussed below, ITT has shown not only the inadequacy of legal remedies and a
balance of hardships in its favor but also that ITT will suffer irreparable
injury if Hilton is allowed to continue to retain Latham.
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15
III. IN THE ALTERNATIVE, THIS COURT SHOULD PRELIMINARILY ENJOIN HILTON FROM
USING LATHAM AS COUNSEL IN ITS HOSTILE TENDER OFFER FOR ITT PENDING THE
RESOLUTION OF THIS MOTION.
When deciding whether to issue a preliminary injunction in a case such as
this that involves the public interest, "the district court should consider
(1) the likelihood that the moving party will prevail on the merits, (2) whether
the balance of irreparable harm favors the [movant], and (3) whether the public
interest favors the moving party". Caribbean Marine Servs. Co. v. Baldrige, 844
F.2d 668, 674 (9th Cir. 1988); see also Northern Alaska Envtl. Ctr. v. Hodel,
803 F.2d 466, 471 (9th Cir. 1986). In the Ninth Circuit,
"where a party can show a strong possibility of success on the merits, he
need only show a slight possibility of irreparable harm. Where, on the
other hand, a party can show only that serious questions are raised, he
must show that the balance of hardships tips sharply in his favor." MAI
Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 517 (9th Cir. 1993).
Under either the traditional three-part test or the Ninth Circuit's
"sliding-scale" analysis, the Court should grant this motion.
A. ITT Has Shown A Substantial Likelihood Of Success On The Merits.
As described above (pp. 6-12), the law is clear that Latham's
representation of Hilton in Hilton's hostile takeover attempt of ITT is a breach
of Latham's ethical duty of loyalty to ITT. Thus, as a matter of law, ITT has
shown a substantial likelihood of success on the merits of this motion.
<PAGE>
16
B. The Public Interest Requires That Hilton Discharge Latham As To ITT
Matters.
Simultaneous representation such as Latham's erodes the public's faith in
the legal system.15 "An attorney who fails to observe his obligation of
undivided loyalty to his client injures his profession and demeans it in the
eyes of the public." Lemelson, 1993 20132 LEXIS, @ * 20; see also Erickson v.
Newmar Corp., 87 F.3d 298, 303 (9th Cir. 1996); Truck Ins. Exch. v. Fireman's
Fund Ins. Co., 8 Cal. Rptr. 2d 228, 232 (Cal. Ct. App. 1992).
As discussed above, (pp. 14-15), the strong public interest in avoiding
such harm to public confidence in the legal profession requires that Hilton
dismiss Latham.
C. ITT Will Suffer Irreparable Harm Unless Hilton Is Required To
Discharge Latham As To ITT Matters.
The breach of an attorney's duty of loyalty is in and of itself irreparable
harm. Only through the remedy of disqualification can "the sanctity of the
attorney-client relationship" be maintained. See Alexander Proudfoot PLC v.
____________
15See Manoir-Electroalloys Corp. v. Amalloy Corp., 711 F. Supp. 188, 195-96
(D.N.J. 1989)("Because the interest sought to be protected by Model Rule 1.7 is
one of loyalty, a per se rule of disqualification should be applied when that
rule is breached. Disqualification will not only protect the present client,
but will have the salutary effect of promoting public confidence in the
integrity of the bar and the judicial system."); IBM v. Levin, 579 F.2d at 283.
("Indeed, the courts have gone so far as to suggest that doubts as to the
existence of an asserted conflict of interest should be resolved in favor of
disqualification").
<PAGE>
Federal Ins. Co., 1994 WL 110531, at *2 (N.D. Ill. Mar. 30, 1994).16 As the
California Supreme Court has explained,
"[a] client who learns that his or her lawyer is also representing a
litigation adversary, even with respect to a matter wholly unrelated to the
one for which counsel was retained, cannot long be expected to sustain the
level of confidence and trust in counsel that is one of the foundations of
the professional relationship". Flatt, 885 P.2d at 955.
The same is true where Hilton already has, and will continue to have,
access to confidential and privileged information about ITT. Moreover, if
client confidences are used in advising the second client, further irreparable
harm occurs.17 Hilton must be enjoined from continuing its relationship with
Latham to protect ITT from this irreparable and continuing harm.
Furthermore, since Hilton would not be unduly harmed by discharging Latham
from representing it on this matter, the balance of hardships clearly favors
granting ITT's motion. Granting this motion will not impair Hilton's choice of
counsel for at least two reasons. First, Latham had substantial pre-existing
ties to both parties such that neither Hilton nor ITT could have engaged Latham
to represent it in the present
_____________
16It is undisputed that a breach of an attorney's duty of loyalty to his or
her client "injures both the client's interests and the legal profession's
integrity". Tyson v. Moore, 613 So.2d 817, 823 (Miss. 1992).
17See Jocelyn N. Sands and Roy Conn, III, Confidentiality and the Lawyer's
Conflicting Duty, 27 How.L.J. 329, 330 and n.5 (1984) ("No matter what the
reason for seeking legal advice, clients always expect their lawyers to preserve
their confidences at all costs. . . . Deference is paid to this expectation in
codes of professional ethics.")
<PAGE>
litigation. Indeed, as a matter of legal ethics, when two of a law firm's major
clients engage in a hostile takeover battle, it should not be left to the law
firm (in the absence of disclosure to and the consent of the parties) to choose
which side to represent. Second, responsibility for any adverse consequences
rests with Latham and Hilton. Wolfram Decl. PARA 22. If Hilton was not
adequately informed by Latham about the firm's conflict, it has a remedy against
the firm for recovery of fees needlessly spent and for other provable damages.
Id. Any fault for Latham's failure to make the required withdrawal rests with
Latham; Hilton's remedies rest there as well. Id.; see also Lemelson,
1993 1993 LEXIS 20132, at * 28-29.18
Conclusion
For the reasons set forth above, ITT respectfully requests that the Court
either grant its motion for summary judgment on Count One of its Counterclaims
seeking permanent injunctive relief requiring Hilton to dismiss Latham as
counsel in connection with Hilton's attempted hostile takeover of ITT, or, in
the alternative, for a preliminary injunction barring Hilton from seeking
Latham's counsel until the Court can review the merits.
_______________
18ITT is similarly entitled to a preliminary injunction under a
"sliding-scale" analysis. ITT demonstrated "a strong possiblity of success on
the merits"; thus, ITT would be entitled to relief even if there "were slight
possibility of irreparable harm." MAI Systems, 991 F.2d at 517. ITT has also
demonstrated that the "balance of hardships tips sharply" in its favor and that
"serious questions" of public policy have been raised; it is entitled to relief
on this ground as well. Id.
<PAGE>
19
Dated this 12th day of February, 1997.
KUMMER KAEMPFER BONNER & RENSHAW
BY:
/s/ Von S. Heinz
________________
THOMAS F. KUMMER
VON S. HEINZ
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
Attorney for Defendant/
Counterdefendant
ITT CORPORATION
<PAGE>
CERTIFICATE OF SERVICE
Pursuant to Fed. R. Civ. P. 5(b), I hereby certify that service of the
foregoing DEFENDANT/COUNTERCLAIMANT ITT'S MOTION FOR A PERMANENT (OR A
PRELIMINARY) INJUNCTION REQUIRING HILTON TO DISCHARGE LATHAM & WATKINS AS
COUNSEL was made this date by delivering by hand a true copy of the same to the
following:
Steve Morris
Kristina Pickering
Schreck Morris
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
and by delivering by facsimile and overnight mail a true copy of the same to the
following:
Bernard W. Nussbaum
Eric M. Roth
Marc Wolinsky
Scott L. Black
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
DATED this 13th day of February, 1997.
/s/ Elizabeth Moulton
______________________________
An Employee of Kummer Kaempfer
Bonner & Renshaw
<PAGE>
[Exhibit 27]
THOMAS F. KUMMER
VON S. HEINZ
KUMMER KAEMPFER BONNER & RENSHAW
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
(702) 792-7000
Attorneys for Defendant/Counterclaimant
ITT CORPORATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
HILTON HOTELS CORPORATION and )
HLT CORPORATION, ) Case No. CV-S-97-95-PMP(RLH)
)
Plaintiffs, )
vs. )
)
ITT CORPORATION, )
)
Defendant. )
)
)
___________________________________)
)
ITT CORPORATION, )
)
Defendant and )
Counterclaimant, )
)
vs. )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Plaintiffs and )
Counterdefendants. )
___________________________________)
ITT'S MEMORANDUM IN OPPOSITION TO HILTON'S MOTION
FOR A PRELIMINARY INJUNCTION
Defendant and counterclaimant, ITT Corporation ("ITT"), respectfully
submits this memorandum in opposition to the January 27, 1997 motion of
plaintiffs and counterdefendants, Hilton
<PAGE>
Hotels Corporation and HLT Corporation (collectively, "Hilton"), for a
preliminary injunction.(1)
PRELIMINARY STATEMENT
Hilton's motion for preliminary injunctive relief has no evidentiary
support and is not warranted in law. Hilton should never have filed the motion.
It should certainly withdraw its motion now.
Hilton's motion is unsupported by any evidence. Contrary to Hilton's
speculation, made without a shred of support, ITT has never had any intention of
increasing the size of the Board of Directors to 25 after February 13, 1997, the
date on which Hilton alleged that it would nominate a slate of 11 directors.
Hilton's "affidavit", made by someone without any personal knowledge, does not
provide any fact from which the Court could infer such an intention. Because
Hilton puts forward no evidence, we do not even need to provide an affidavit to
refute the speculation of Hilton's counsel. Moreover, Hilton did not, in fact,
nominate only 11 directors; rather, on February 11, 1997, it nominated 25.
Although Hilton, on February 12, 1997, advised the Court of an error in its
citation, Hilton failed to advise the Court that it had mooted the alleged basis
for its motion and that all that is left is a vague request for an advisory
opinion, indeed an unprecedented advisory injunction.
- ---------------------
(1)Citation to Hilton's memorandum in support of its motion will be in the
form "Pl. Br. at ___." Citations to the Affidavit of Robert M. Sader in Support
of Defendant ITT Corporation's Opposition to Plaintiffs' Motion for Preliminary
conjunction, submitted herewith, will be in the form "Sader Aff. at __."
-2-
<PAGE>
Even if there were any factual basis for Hilton's argument, and even if
this Court were inclined to give an advisory injunction, Hilton's motion is not
warranted in law. Hilton simply misstates the law of Delaware and fails to
advise the Court of the important differences between Nevada law and Delaware
law.
Hilton's present attempt to obtain preliminary relief bears a striking
resemblance to its earlier effort to obtain preliminary relief prohibiting ITT
from filing suit in any other court. In denying Hilton's earlier motion, this
Court held "that Hilton's alleged harm fails to meet the requirements for a
temporary restraining order or preliminary injunction." Order dated January 29,
1997, at 2. Once more, Hilton has not demonstrated that ITT has taken, or is
likely to take, the actions sought to be enjoined. And, once more, Hilton has
failed to show that these unspecified actions not yet taken, if later shown to
be wrongful, could not be remedied by a motion for injunctive relief if these
actions were ever taken or threatened.
ITT repeats, Hilton should withdraw its motion. In any event, Hilton has
not met any of the requirements for the grant of a preliminary injunction.
FIRST, Hilton has not shown any likelihood of success on the merits.
Hilton simply cannot demonstrate that the speculative scenario on which its
motion is premised can, will or is likely to come to pass. Indeed, Hilton has
shown that it cannot. Moreover, Hilton misstates the applicable Nevada law with
respect to its request for an advisory injunction. See Section I, infra.
-3-
<PAGE>
SECOND, Hilton cannot demonstrate any harm, much less an immediate threat
of irreparable harm. Not only was there never any basis for Hilton's
speculation, but Hilton has "cured" the spectre that it created. Additionally,
Hilton has not submitted any evidence tending to show that ITT has taken, is
threatening to take or is likely to take, the unspecified actions not yet taken
but which Hilton nonetheless seeks to enjoin. Hilton's request for an advisory
injunction should be denied. See Section II, infra.
THIRD, the balance of hardships clearly favors ITT. Given Hilton's
inability to demonstrate any possibility of injury, much less an immediate
threat of irreparable injury, as well as its failure to demonstrate a likelihood
of success on the merits, issuance of an advisory injunction at this time would
clearly cause greater harm to ITT. See Section III, infra.
THE FACTS
A. HILTON'S TENDER OFFER AND ITT'S RESPONSE
On January 27, 1997, Hilton announced its intention to commence a hostile
tender offer for 50.1% of the outstanding shares of ITT common stock at a cash
price of $55 per share (the "Offer") and to engage in a merger with ITT in which
each remaining share of ITT common stock would be exchanged for shares of Hilton
common stock nominally valued at $55 (the "Proposed Squeeze Out Merger").
Complaint PARA PARA 1, 8.
On January 31, 1997, Hilton filed with the Securities and Exchange
Commission ("SEC") a Tender Offer Statement on Schedule 14D-1 (the "14D-1").
The 14D-1 states that the $55 nominal value of Hilton common stock to be
received in the Proposed Squeeze Out
-4-
<PAGE>
Merger is subject to certain unspecified collar provisions (14D-1, Ex.(a)(1),
Offer to Purchase, at 1), and that plaintiffs are not undertaking any obligation
to qualify the Offer and Proposed Squeeze Out Merger as a tax-free
"reorganization" (id. at 14). The resultant uncertainty concerning the actual
value of the consideration to be received in the Proposed Squeeze Out Merger,
plus Hilton's failure to disclose sufficient information regarding the merits of
a longer-term investment in Hilton, reveal that the Offer is part of a
two-tiered, front-end loaded transaction designed to coerce ITT's stockholders
to tender their shares in the Offer to avoid receiving in the Proposed Squeeze
Out Merger shares of Hilton common stock of uncertain actual value. See ITT's
Solicitation/Recommendation Statement on Schedule 14D-9 ("14D-9")(Exhibit A to
ITT's Answer and Counterclaim) at 4-5.
On February 11, 1997, the Board of ITT met to consider the Offer and
Proposed Squeeze Out Merger and to determine what recommendation the Board
should make to ITT's stockholders with respect to the Offer. Id. at 3. At that
meeting the Board unanimously voted to recommend that the stockholders reject
the Offer, because, inter alia, it represents an inadequate value. Id. at 3-4.
On February 11, 1997, Hilton announced two proposals in connection with the
next annual meeting of ITT's stockholders (the "Annual Meeting Proposals").
These proposals eliminate Hilton's self-induced fear that ITT would amend the
by-laws to increase the size of the Board to 25 after Hilton had nominated 11
candidates:
-5-
<PAGE>
(1) Hilton gave notice of its intention to nominate candidates for
election to ITT's Board of Directors at the next annual meeting
of ITT's stockholders--the Hilton-proposed slate of nominees
includes 25 individuals; and
(2) Hilton gave notice of its intention to present a resolution to
the stockholders at the next annual meeting to repeal each and
every provision of ITT's by-laws adopted on or after July 23,
1996 and prior to the date of the adoption of said resolution.
(See 14D-1, Amendment No. 3, Exs. (g)(4) & (g)(5)).
On February 12, 1997, ITT filed its 14D-9 with the SEC, setting forth the
Board's recommendation with respect to the Offer and the reasons therefor.
B. HILTON'S COMMENCEMENT OF THIS LITIGATION
On January 27, 1997, the same day as Hilton's first announcement of, but
prior to the actual commencement of, the Offer, Hilton filed suit in this Court
purporting to seek judicial aid in support of its attempt to acquire control of
ITT. The Complaint alleges that Hilton, in addition to launching the Offer,
intends to conduct a proxy contest aimed at replacing the current members of
ITT's Board with Hilton nominees who would agree to sell ITT to Hilton.
Complaint PARA 10.
Simultaneously with the filing of its Complaint, Hilton filed the instant
motion for a preliminary injunction. The "factual" basis for Hilton's motion is
the Affidavit of Eric M. Roth ("Roth Aff."). See Pl. Br. at 2 n.*. Mr. Roth,
one of Hilton's counsel (Roth Aff. at PARA 1), does not purport to base his
affidavit on personal knowledge. Instead, Mr. Roth's affidavit consists
primarily of unsupported and speculative assertions and legal conclusions. See,
e.g., Roth Aff. at PARA 17 ("If ITT and its
-6-
<PAGE>
directors were to enlarge the size of the Board . . . plaintiffs would suffer
irreparable injury"). Moreover, Hilton's entire motion for preliminary relief
is based on unsupported speculation that, if ITT were to take certain actions,
and if those actions were to have certain effects, Hilton might be harmed. In
essence, Hilton's motion seeks an advisory injunction.
Two days later, on January 29, 1997, Hilton filed a motion for a temporary
restraining order and preliminary injunction enjoining ITT from filing any
action against Hilton arising out of Hilton's Offer or Proposed Squeeze Out
Merger in any court other than this Court. On the same day, this Court denied
that motion, noting that "Hilton's alleged harm fails to meet the requirements
for a temporary restraining order or preliminary injunction" and that "this
Court has no basis to conclude that ITT has violated or is likely to violate
Rule 13." Order dated January 29, 1997, at 2.
ARGUMENT
The Ninth Circuit has approved two formulations of the test for determining
the appropriateness of a preliminary injunction. The "sliding scale", on which
Hilton relies (see Pl. Br. at 8), requires the movant to demonstrate either (1)
probability of success on the merits and the possibility of irreparable injury
or (2) the existence of serious questions going to the merits and the balance of
hardships tipping in the movant's favor. See William Inglis & Sons Baking Co.
v. ITT Continental Baking Co., 526 F.2d 86, 88 (9th Cir. 1975).
The "traditional" standard requires the movant to show (1) a strong
likelihood of success on the merits, (2) the possibility of
-7-
<PAGE>
irreparable injury to the movant absent relief, (3) a balance of hardships
favoring the movant, and (4) in certain cases, advancement of the public
interest. Los Angeles Mem'l Coliseum Comm'n v. NFL, 634 F.2d 1197, 1200 (9th
Cir. 1980).
Regardless of which formulation this Court applies, Hilton cannot make the
requisite showings.
I. HILTON HAS NOT DEMONSTRATED A LIKELIHOOD OF SUCCESS ON THE MERITS
A. HILTON HAS SUBMITTED NO EVIDENCE IN SUPPORT OF ITS MOTION
Hilton's motion for preliminary injunctive relief is premised on Hilton's
argument that two highly speculative set of circumstances would, if they came to
pass, violate the duties of ITT's Board of Directors. Hilton is wrong.
FIRST, Hilton speculates that, if Hilton were to nominate only 11
individuals to stand for election as directors of ITT at the next annual
meeting of the stockholders,(2) and if ITT's Board thereafter increased the
number of directors to 25, Hilton's nominees, if elected, would be prevented
from constituting a majority of the Board. Pl. Br. at 1-2 & 7. Hilton's
double speculation is doubly false. ITT did not increase the size of its Board
after Hilton nominated 11 directors. Indeed, Hilton did not nominate 11
directors. Hilton nominated 25 directors. Hilton has "cured" its
self-inflicted and speculative problem.
SECOND, Hilton speculates that, if the Board, in some unspecified fashion,
amended the by-laws, and if such an amendment
- ---------------------
(2)The Board of ITT currently has 11 members.
-8-
<PAGE>
impeded in some way the effective exercise of the stockholder franchise, such
unspecified actions could, if ITT's stockholders wanted to elect Hilton's
nominees as majority of the Board, conceivably prevent Hilton's nominees from
having a chance to be elected as a majority of the Board. Id. at 7. Hilton
does not provide any facts or even an affidavit by someone with personal
knowledge of a fact to support this multi-layered speculation.(3)
Because Hilton has not proved -- and cannot prove -- concrete facts on
which its claim for relief is based, Hilton cannot demonstrate a likelihood of
success on the merits. In essence, Hilton seeks an advisory injunction against
some uncertain future, if ITT took certain actions, if those actions had certain
effects, and if they were motivated by certain unproven justifications.
B. HILTON HAS MISSTATED THE LAW
In light of Hilton's failure to demonstrate any facts at all in support of
its motion, ITT hesitates to burden the court with a response to Hilton's legal
argument. However, because Hilton so
- ---------------------
(3)Although Hilton has submitted the "affidavit" of its counsel, Eric Roth,
in support of its motion, that document provides no factual basis from which the
Court could even infer the factual findings necessary to support the relief
Hilton seeks. Moreover, because Mr. Roth's "affidavit" is not made on personal
knowledge, and consists instead of speculation and legal conclusions, the Court
should give it no weight. See, e.g., American Passage Media Corp. v. Cass
Communications, Inc., 750 F.2d 1470, 1473 (9th Cir. 1985) (discounting
affidavits); Los Angeles Mem'l Coliseum Comm'n v. NFL, 634 F.2d 1197, 1202 (9th
Cir. 1980) (same); cf. FTC v. Publishing Clearing House, Inc. ___ F.3d ___, 1997
WL 11635, * 2 (9th Cir. 1997) ("[a] conclusory, self-serving affidavit, lacking
detailed facts and any supporting evidence, is insufficient to create a genuine
issue of material fact").
-9-
<PAGE>
seriously misstates Nevada law, and because, as demonstrated by the recent
letter to the Court from Hilton's counsel (see letter from Steve Morris to The
Honorable Philip M. Pro, dated February 12, 1997, at 2), Hilton continues to
persist in this misstatement, and Hilton has not yet withdrawn its request for
an advisory injunction, ITT is constrained to respond.
Hilton bases its arguments on Delaware case law.(4) In doing so, Hilton
commits two fundamental errors. First, Hilton misstates Delaware law. Second,
Hilton fails to recognize that the Nevada statutory scheme creates significant
differences between Delaware and Nevada law.
1. HILTON MISSTATES DELAWARE LAW
Although Hilton does not explicitly admit as much, its argument--especially
in light of its inability to demonstrate any injury--appears to be that, under
Delaware law, any amendment to the by-laws that impedes the effective exercise
of the shareholder franchise is per se illegal. See, e.g., Pl. Br. at 10-11.
However, in Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660-62 (Del. Ch.
1988), the court explicitly rejected a per se rule, and instead held that, under
certain circumstances, a board could take action for the primary purpose of
interfering with a
- ---------------------
(4)Hilton does cite to one Nevada federal court authority, Shoen v. AMERCO,
885 F. Supp. 1332 (D. Nev. 1994), modified, 1996 WL 904199 (D. Nev. 1994),
vacated pursuant to settlement, Feb. 9, 1995. The Shoen court relied on
Delaware authority (id. at 1341 n. 20), but did so without any analysis of the
significant differences between Delaware and Nevada law. In fact, from the
opinion, it does not appear that these differences were briefed to the Shoen
court. See, e.g., id. at 1341 n.20.
-10-
<PAGE>
shareholder vote. See, e.g., id. at 662 & n.5; Stahl v. Apple Bancorp, Inc.,
579 A.2d 1115, 1123 (Del. Ch. 1990) (refusing to enjoin board's decision to
defer the annual meeting) (cited in Pl. Br. at 10); Dolgoff v. Projectavision,
Inc., 1996 WL 91945, *8 (Del. Ch. 1996) (denying injunction where board's
alleged manipulation of electoral process was not for the primary purpose of
interfering with the shareholder franchise) (cited in Pl. Br. at 11).
Moreover, even under Delaware law, Blasius does not apply in the
circumstances presented here. Under Delaware law, when the challenged action is
undertaken by the Board as a defensive measure in response to a hostile takeover
attempt, the Board's action is reviewed under the standard set forth in Unocal
Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).(5) This is the case even
where the defensive measure has an impact on the effective exercise of the
shareholder franchise.(6)
- ---------------------
(5)Note that the court in Shoen, while applying Blasius, distinguished the
case before it from cases involving a hostile tender offer. Shoen, 885 F. Supp.
at 1341 n.22.
(6)In Stroud v. Grace, 606 A.2d 75, 92 n.3 (Del. 1992), the Delaware
Supreme Court noted that:
"Board action interfering with the exercise of the franchise often arose
during a hostile contest for control where an acquiror launched both a
proxy fight and a tender offer. Such action necessarily invoked both
Unocal and Blasius. We note that the two tests are not mutually
exclusive because both recognize the inherent conflicts of interest that
arise when shareholders are not permitted free exercise of their
franchise.
Gilbert [v. El Paso Co., 575 A.2d 1131 (Del. 1990)] should nonetheless
resolve any ambiguity. It clearly holds that a reviewing court must
apply Unocal where the board 'adopts any defensive measure taken in
response to some threat to
-11-
<PAGE>
Under the Unocal standard, board action in response to a hostile offer
will be afforded the protections of the business judgment rule when (1) there
were reasonable grounds for believing that a danger to corporate policy and
effectiveness existed and (2) the defensive response was reasonable in relation
to that danger. See, e.g., Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361,
1373 (Del. 1995).
2. THE NEVADA STATUTORY SCHEME REQUIRES MODIFICATION OF THE
DELAWARE STANDARDS
NRS Section 78.138 contains several pertinent provisions regarding the
duties and powers of the directors of a Nevada corporation that demonstrate that
wholesale adoption of the Delaware standards would be contrary to Nevada law.
FIRST, with specific reference to actions taken as a response to a
hostile takeover attempt, the Nevada legislature has provided in NRS Section
78.138(4):
"Directors may resist a change or potential change in control of
the corporation if the directors by a majority vote of a quorum
determine that the change or potential change is opposed to or
not in the best interest of the corporation:
(a) Upon consideration of the interests of the corporation's
stockholders and any of the matters set forth in subsection
3. . . ."
Subsection 3 of NRS Section 78.138, in turn, provides that directors may
consider:
"(a) The interests of the corporation's employees, suppliers,
creditors and customers;
- ---------------------
corporate policy and effectiveness which touches upon
issues of control.'" (Citations omitted).
-12-
<PAGE>
(b) The economy of the state and nation;
(c) The interests of the community and of society; and
(d) The long-term as well as short-term interests of the
corporation and its stockholders, including the possibility
that these interests may be best served by the continued
independence of the corporation."
These provisions make clear that, under Nevada law, "the interests of
the corporation" are not necessarily synonymous with "the interests of the
stockholders", especially when the corporation is faced with a hostile takeover
attempt. See Sader Aff. at PARA 13. In fact, the interests of the stockholders
is only one of the many factors directors are permitted to consider in
determining what actions are in the best interests of the corporation. Id. at
PARA 12. Thus, in considering whether to take action to resist a hostile
takeover attempt, the directors of a Nevada corporation may lawfully determine
that the attempt, even if perhaps in the short-term interests of the
stockholders, presents a threat to the interests of the corporation. Id. at
PARA PARA 11-13 & 16.
SECOND, NRS Section 78.138(1) provides: "Directors and officers shall
exercise their powers in good faith and with a view to the interests of the
corporation."
This standard varies from the common law statement of a director's
duties in that there is no requirement in the Nevada statute that the director's
actions be those that a reasonably prudent person in a similar position would
take under similar circumstances. See Sader Aff. at PARA 9. Because the Nevada
-13-
<PAGE>
legislature has chosen to eliminate any requirement that directors meet a
"reasonably prudent director" standard, the objective reasonableness of a
director's actions is not the subject of review. Id. at PARA PARA 9 & 16.(7)
Rather, under the Nevada statutory scheme, the only pertinent inquiries are
whether the directors acted in good faith and with a view towards the interests
of the corporation. Id. at PARA PARA 8-9 & 16.(8)
- ---------------------
(7)The Shoen court appears to have accepted that this interpretation of
the plain language of the statute would apply in the context of a hostile
takeover. See Shoen, 885 F. Supp. at 1341 n.22. Moreover, as described by Mr.
Sader, who was the Chairman of the Nevada Assembly Judiciary Committee that
drafted and introduced the legislation making these changes to Nevada law, in
adopting these statutes, "it was the Legislature's intent to distinguish and
disavow standards adopted in other jurisdictions, which impose other degrees of
scrutiny of directors' decisions in takeover and non-takeover situations."
Sader Aff. PARA 16. Thus, plaintiffs' argument (and any cases cited in support
of their argument) that "[d]irectors' action affecting shareholders' right to
vote are subjected to strict judicial scrutiny" (Pl. Br. at 8), conflicts with
the express purpose and intent of the Nevada legislature. See also Sader Aff.
PARA 10 ("the Legislature reviewed, but by enacting NRS 78.138(1) did not adopt,
the approach taken by some other jurisdictions in applying a heightened standard
of scrutiny to the actions taken by directors in certain circumstances, such as
in response to a proposed acquisition of control of the corporation").
(8)Courts in other states with statutory provisions similar to the Nevada
statute have come to this same conclusion. For example, in WLR Foods, Inc. v.
Tyson Foods, Inc., 65 F.3d 1172, 1184-85 (4th Cir. 1995), cert. denied, 116 S.
Ct. 921 (1996), the court considered the meaning of Va. Code Ann.
Section 13.1-690, which provides:
"A director shall discharge his duties as a director, including his duties
as a member of a committee, in accordance with his good faith business judgment
of the best interests of the corporation."
The Court, upon reviewing this language and noting that it "contains no
reference to the 'reasonable person'" (WLR Foods, 65 F.3d at 1185), held
that "[d]irectors' actions in Virginia are not to be judged for their
reasonableness . . . ." Id.
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<PAGE>
This element of the Nevada statutory scheme results in a necessary--and
important--modification of the analysis. Under Unocal as applied in Delaware,
the court is called upon to judge the objective reasonableness of the directors'
determination that a threat existed and the objective reasonableness of the
directors' actions taken in response to such a threat. By contrast, even if one
is to apply the Unocal framework within the context of the Nevada statutory
scheme, the only inquiry is whether the directors subjectively determined in
good faith that a threat existed and subjectively determined that the challenged
action was a reasonable response to that threat. See Sader Aff. at PARA 16.
Applying Nevada law, Hilton's motion for an advisory injunction must
therefore be denied because Hilton cannot show--and does not even argue--that
any future determination by the Board of ITT to take the unspecified,
hypothetical actions sought to be enjoined could not be made in good faith and
with a view towards the interests of the corporation.
II. HILTON CANNOT DEMONSTRATE AN IMMEDIATE THREAT OF IRREPARABLE INJURY
A preliminary injunction, being "a harsh and drastic remedy"(9),should
issue only to prevent immediate, threatened and irreparable injury to the
movant. Caribbean Marine Servs. Co., Inc. v. Baldridge, 844 F.2d 668, 674 (9th
Cir. 1988) ("a plaintiff must
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(9)Abend v. MCA, Inc., 863 F.2d 1465, 1479 (9th Cir. 1988), aff'd, 495
U.S. 207 (1990); see also Hurd v. Hodge, 334 U.S. 24, 36 (1948) (Frankfurter,
J., concurring) (injunction is "extraordinary" remedy which is not granted as of
right).
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<PAGE>
demonstrate immediate threatened injury as a prerequisite to preliminary
injunctive relief").
In essence, this Court is being asked to grant extraordinary (and
advisory) injunctive relief based on a factual vacuum. Hilton's request does
not even rise to the level of a justiciable controversy, much less satisfy its
burden on this motion.
Hilton does not and cannot demonstrate an immediate threat of irreparable
injury. Hilton did not submit any evidence(10) demonstrating that ITT has
taken, or is even likely to take, the actions Hilton seeks to enjoin. Hilton
has itself provided the cure for the harm it created and purportedly feared by
nominating 25 directors. Moreover, with respect to Hilton's fear of
unspecified future by-law amendments, it is clear that the Court could deal
with any challenge to such action when and if it occurred. Given these facts,
the future and uncertain injuries
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(10)Hilton's reference to statements contained in an August 20, 1995
proxy statement (see Pl. Br. at 7) do not demonstrate an immediate threat. The
August 20, 1995 proxy statement was issued by ITT's former corporate parent
("Old ITT") in connection with a special meeting to consider a proposed
reorganization of Old ITT. Part of that reorganization involved the
distribution to Old ITT's stockholders of all of the outstanding common stock of
ITT (which was, at that time, known as ITT Destinations, Inc.). To aid the
stockholders in determining whether to vote in favor of the reorganization, the
proxy statement described, inter alia, various provisions of Nevada law and
ITT's Articles of Incorporation and by-laws. Hilton does not appear to argue
that any of the Nevada statutes or any of ITT's articles or by-laws are illegal
in and of themselves. That an 18-month old proxy statement disclosed the
possibility of such action can hardly be considered proof that there is a
present and immediate threat that ITT will take such action now, much less that
it would take such action for an improper purpose.
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Hilton alleged cannot--by definition--be considered "irreparable", "immediate"
or "threatened".
Hilton's motion presents a situation even more tenuous than that
addressed by the Ninth Circuit in Los Angeles Mem'l Coliseum Comm'n v. NFL,
634 F.2d 1197 (9th Cir. 1980). In that case, the Ninth Circuit reversed, as an
abuse of discretion, the entry of a preliminary injunction enjoining defendant
from applying a section of the NFL's Constitution and by-laws to prevent a
proposed transfer by the Oakland Raiders of their home game playing site to the
Los Angeles Memorial Coliseum. In that case, the plaintiff sought to enjoin the
application of the by-law but submitted no competent evidence that the by-law
would, in fact, be so utilized. The Ninth Circuit found therefore that the
plaintiff had "demonstrated no real and concrete injury or even threat thereof
when it sought the preliminary injunction." Id. at 1201. The Ninth Circuit
further noted that "[s]ince the rule had not yet been applied to the proposed
transfer when the injunction was sought . . . [plaintiff] was seeking an
advisory opinion on the rule's validity 'as applied.'" Id. at 1202, n. 5.
Likewise, although Hilton may fear that the ITT Board might take some
unspecified action under its by-laws at some future date, they have made no
showing that any such action is imminent or threatened. "An injunction will not
be granted against something merely feared as liable to occur at some indefinite
time in the future." General Fireproofing Co v. Wyman, 444 F.2d 391, 393 (2d
Cir. 1971).
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Under these circumstances, Hilton's request for preliminary relief must
be denied:
"The dramatic and drastic power of injunctive force may be
unleashed only against conditions generating a presently
existing actual threat; it may not be used simply to
eliminate a possibility of a remote future injury, or a
future invasion of rights, be those rights protected by
statute or by the common law."
Holiday Inns of America, Inc. v. B&B Corp., 409 F.2d 614, 618 (3d Cir. 1969);
See also Caribbean Marine, 844 F.2d at 675.
III. THE BALANCE OF HARDSHIPS FAVORS ITT
Although Hilton relies in its memorandum only on the first part of the
so-called "sliding scale" legal standard for the issuance of a preliminary
injunction (Pl. Br. at 8, et seq.), this does not mean that the Court must
ignore the harm such an injunction would cause ITT. As the Ninth Circuit noted
in Los Angeles Mem'l Coliseum Comm'n, 634 F.2d at 1203: "Inglis clarified and
added flexibility to understanding the [movant's burden]; it did not eliminate
the requirement that some balance of hardships favoring that party be
established by the record".(11)
As previously discussed, Hilton will suffer no harm if an injunction is
not ordered. Hilton will suffer no harm at all.
On the other hand, Hilton fails entirely to address the very real harms
that an advisory injunction would inflict on ITT.
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(11)For example, in plaintiffs' primary authority, Shoen, the court,
although applying the sliding scale test, analyzed the balance of hardships.
See Shoen, 885 F. Supp. at 1352. See also Regents of Univ. of California v.
ABC, 747 F.2d 511, 515 (9th Cir. 1984) ("None of the respective factual
inquiries described by the various standards are irrelevant to the district
court's essential task of balancing the equities . . .").
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Where, as here, ITT's Board must consider and respond to a hostile tender offer,
the considerations that militate against judicial oversight of corporate affairs
are strongly present. See, e.g., In re Ray, 16 Misc.2d 1088, 1089, 182 N.Y.S.2d
951, 952 (N.Y. Sup. Ct. 1958) ("courts are reluctant to interfere by injunction
with the internal affairs of corporations"). Further, the generality and
overbreadth(12) of Hilton's advisory injunction would "have an unwarranted
chilling effect"(13) upon the Board's discharge of its duties, by invoking the
judicial power of contempt, a "potent weapon" which, when "founded upon a
decree too vague to be understood . . . can be a deadly one." Gunn v.
University Comm. To End the War, 399 U.S. 383, 389 (1970). Hilton's proposed
advisory injunction is so broad, in fact, that the ITT directors would be
chilled from making any change, even if perfectly appropriate.
Moreover, ITT respectfully notes that, in the context of the anticipated
proxy contest, any injunction by this court threatens to be misunderstood as a
reprimand of the incumbent board by a court charged with supervising fiduciary
obligations. See generally Davis Acquisition Inc. v. NWA Inc., 1989 WL 40845
(Del.
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(12)Hilton's motion, in seeking to enjoin any amendment that would "impede
in any way the effective exercise of the stockholder franchise" (Pl. Br. at 2,
emphasis added), violates "the traditional rule that injunctive relief should be
narrowly tailored to remedy the specific harms shown by plaintiffs, 'rather than
to "enjoin all possible breaches of the law.'" Zepeda v. INS, 753 F.2d 719, 728
n.1 (9th Cir. 1983), quoting Davis v. Romney, 490 F.2d 1360, 1370 (3d Cir.
1974), quoting Hartford-Empire Co. v. United States, 323 U.S. 386, 410 (1945).
(13)See Saxony Prods., Inc. v. Guerlain, Inc., 594 F.2d 230, 231 (9th Cir.
1979)(dissolving permanent injunction on grounds of generality).
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Ch. 1989) (refusing to enjoin issuance of defensive stock rights). "[T]his
spectre that an expression by the court may have a substantial impact requires
that a court in such a setting exercise particular care" in considering a
request for preliminary injunctive relief. Id. at *5. As in Hilton's motion
for a temporary restraining order, this Court has no basis to conclude that ITT
has violated or is likely to violate the law.
CONCLUSION
For all of the reasons set forth above, ITT respectfully requests that
the Court deny Hilton's motion.
Dated this 14th day of February, 1997.
KUMMER KAEMPFER BONNER & RENSHAW
BY:/s/ Von S. Heinz
-----------------------------------
THOMAS F. KUMMER
VON S. HEINZ
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
Attorneys for Defendant/
Counterclaimant
ITT CORPORATION
CERTIFICATE OF SERVICE
Pursuant to Fed. R. Civ. P. 5(b), I hereby certify that service of the
foregoing ITT'S MEMORANDUM IN OPPOSITION TO HILTON'S MOTION FOR A PRELIMINARY
INJUNCTION was made this date by delivering by hand a true copy of the same to
the following:
Steve Morris
Kristina Pickering
Schreck Morris
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
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and by delivering by facsimile and overnight mail a true copy of the same to the
following:
Bernard W. Nussbaum
Eric M. Roth
Marc Wolinsky
Scott L. Black
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
DATED this 14th day of February, 1997.
/s/ Carol Ann Slater
-----------------------------------
An Employee of Kummer Kaempfer
Bonner & Renshaw
